G.R. No.
109172 August 19, 1994 that its obligation to the bank be declared as
TRANS-PACIFIC INDUSTRIAL SUPPLIES,
INC., petitioner,
vs.
The COURT OF APPEALS and ASSOCIATED
BANK, respondents.
Petitioner applied for and was granted several
financial accommodations amounting to
P1,300,000.00 by respondent Associated Bank.
The loans were evidenced and secured by four
(4) promissory notes, a real estate mortgage
covering three parcels of land and a chattel
mortgage over petitioner's stock and inventories.
Unable to settle its obligation in full, petitioner
requested for, and was granted by respondent
bank, a restructuring of the remaining
indebtedness which then amounted to
P1,057,500.00..
To secure it, three new promissory notes were
executed by Trans-Pacific..
The mortgaged parcels of land were substituted
by another mortgage covering two other parcels
of land and a chattel mortgage on petitioner's
stock inventory. The released parcels of land
were then sold and the proceeds amounting to
P1,386,614.20, according to petitioner, were
turned over to the bank and applied to Trans-
Pacific's restructured loan. Subsequently,
respondent bank returned the duplicate original
copies of the three promissory notes to Trans-
Pacific with the word "PAID" stamped thereon.
However later, Associated Bank demanded from
Trans-Pacific payment of the amount of
P492,100.00 representing accrued interest on a
promissory note. According to the bank, the
promissory notes were erroneously released.
Trans-Pacific initiated an action before the
Regional Trial Court of Makati, for specific
performance and damages. There it prayed that
the mortgage over the two parcels of land be
released and its stock inventory be lifted and
having been fully paid.
After trial, the court a quo rendered judgment in
favor of Trans-Pacific
Respondent bank elevated the case to the
appellate court which, as aforesaid, reversed the
decision of the trial court. whether or not
petitioner has indeed paid in full its obligation to
respondent bank.
The trial court ruled that petitioner has fully
discharged its obligation by virtue of its
possession of the documents (stamped "PAID")
evidencing its indebtedness. Respondent court
disagreed and held, among others, that the
documents found in possession of Trans-Pacific
are mere duplicates and cannot be the basis of
petitioner's claim that its obligation has been
fully paid. Accordingly, since the promissory
notes submitted by petitioner were duplicates
and not the originals, the delivery thereof by
respondent bank to the petitioner does not merit
the application of Article 1271 (1st par.) of the
Civil Code which reads:
Art. 1271. The delivery of a
private document evidencing a
credit, made voluntarily by the
creditor to the debtor, implies
the renunciation of the action
which the former had against
the latter.
Respondent court is of the view that the above
provision must be construed to mean the original
copy of the document evidencing the credit and
not its duplicate
The above pronouncement of respondent court
is manifestly groundless. It is undisputed that the
documents presented were duplicate originals
and are therefore admissible as evidence.
Further, it must be noted that respondent bank
itself did not bother to challenge the authenticity
of the duplicate copies submitted by petitioner.
A duplicate copy of the original may be admitted
in evidence when the original is in the
possession of the party against whom the
evidence is offered, and the latter fails to
produce it after reasonable notice (Sec. 2[b],
Rule 130), as in the case of respondent bank.
This notwithstanding, we find no reversible error
committed by the respondent court in disposing
of the appealed decision. The presumption
created by the Art. 1271 of the Civil Code is not
conclusive but merely prima facie. If there be
no evidence to the contrary, the presumption
stands. Conversely, the presumption loses its
legal efficacy in the face of proof or evidence to
the contrary. In the case before us, we find
sufficient justification to overthrow the
presumption of payment generated by the
delivery of the documents evidencing petitioners
indebtedness.
It may not be amiss to add that Article 1271 of
the Civil Code raises a presumption, not of
payment, but of the renunciation of the credit
where more convincing evidence would be
required than what normally would be called for
to prove payment. The rationale for allowing the
presumption of renunciation in the delivery of
a private instrument is that, unlike that of a
public instrument, there could be just one copy
of the evidence of credit. Where several
originals are made out of a private document,
the intendment of the law would thus be to refer
to the delivery only of the original original rather
than to the original duplicate of which the debtor
would normally retain a copy. It would thus be
absurd if Article 1271 were to be applied
differently.
As for the records, there is actually none
submitted by petitioner to prove that the
contested amount, i.e., the interest, has been
paid in full. . Petitioner could have easily
adduced the receipts corresponding to the
amounts paid inclusive of the interest to prove
that it has fully discharged its obligation but it did
not.
There is likewise nothing on
the records relied upon by
the trial court to support its
claim, by empirical evidence,
that the amount
corresponding to the interest
has indeed been paid. The
trial court totally relied on a
disputable presumption that
the obligation of petitioner as
regards interest has been
fully liquidated by the
respondent's act of delivering
the instrument evidencing
the principal obligation.
That petitioner has not fully liquidated its
financial obligation to the Associated Bank finds
more than ample confirmation and self-defeating
posture in its letter, addressed to respondent
bank, viz.:
we propose that you permit us
to fully liquidate the remaining
obligations to you of P492,100
through a payment in kind
(dacion en pago) arrangement
by way of the equipments (sic)
and spare parts under chattel
mortgage to you []
As you may be able to glean
from these letters and from your
credit files, we have always
been conscious of our
obligation to you which had not
been faithfully serviced on
account of unfortunate business
reverses.
To determine the admissibility or non-
admissibility of an offer to compromise, the
circumstances of the case and the intent of the
party making the offer should be considered.
Thus, if a party denies the existence of a debt
but offers to pay the same for the purpose of
buying peace and avoiding litigation, the offer of
settlement is inadmissible. If in the course
thereof, the party making the offer admits the
existence of an indebtedness combined with a
proposal to settle the claim amicably, then, the
admission is admissible to prove such
indebtedness Exactly, this is what petitioner did
in the case before us for review.
GR. No. L-74027 December 7, 1989
SILAHIS MARKETING
CORPORATION, petitioner
vs.
INTERMEDIATE APPELLATE COURT and
GREGORIO DE LEON, doing business under
the name and style of "MARK INDUSTRIAL
SALES", respondents.
Jaime V. Villanueva for petitioner.
Tinga, Fuentes, Tagle & Malate for private
respondent.
FERNAN, C.J.
Gregorio de Leon (De Leon for short) doing
business under the name and style of Mark
Industrial Sales sold and delivered to Silahis
Marketing Corporation (Silahis for short) various
items of merchandise covered by several
invoices in the aggregate amount of P 22,213.75
payable within thirty (30) days. Allegedly due to
Silahis' failure to pay its account upon maturity
despite repeated demands, de Leon filed before
the then Court of First Instance of Manila a
complaint for the collection of the said accounts
including accrued interest thereon in the amount
of P 661.03 and attorney's fees
The answer admitted the allegations of the
complaint insofar as the invoices were
concerned but presented as affirmative
defenses; a debit memo for P 22,200.00 as
unrealized profit for a supposed commission that
Silahis should have received from de Leon for
the sale of sprockets made directly to Dole
Philippines, Incorporated by the latter without
coursing the same through the former allegedly
in violation of the usual practice concerning sale
of merchandise to Dole Philippines, Inc.; and [b]
Silahis' claim that it is entitled to return the
stainless steel screen which was found defective
by its client, and to have the corresponding
amount cancelled from its account with de Leon.
the lower court confirmed the liability of Silahis
for the claim of de Leon but at the same time
ordered that it be partially offset by Silahis'
counterclaim as contained in the debit memo for
unrealized profit and commission.
De Leon appealed from the said decision insofar
as it directed partial compensation and its failure
to award interest on his principal claim as well
as attomey's fees in his favor. Intermediate
Appellate Court 4 set aside the decision of the
lower court and dismissed herein petitioner's
(therein defendant- appellee's) counterclaim for
lack of factual or legal basis. The appellate court
found that there was no agreement, nor was
there any contractual obligation between De
Leon and Silahis prohibiting any direct sales to
Dole Philippines, Inc. by de Leon; nor was there
anything in the debit memo obligating de Leon to
pay a commission to Silahis.
whether or not private respondent is liable to
the petitioner for the commission or margin
for the direct sale which the former
concluded and consummated with Dole
Philippines, Incorporated without coursing
the same through herein petitioner.
We have carefully gone over the record of this
case particularly the debit memo upon which
petitioner's counterclaim rests and found nothing
contained therein to show that private
respondent obligated himself to set-off or
compensate petitioner's outstanding accounts
with the alleged unrealized commission from the
assailed sale of sprockets in the amount of P
111,000.00 to Dole Philippines, Inc.
It must be remembered that compensation takes
place when two persons, in their own right, are
creditors and debtors to each other. Article 1279 DEL CASTILL
of the Civil Code provides that: "In order that PEREZ, JJ.
compensation may be proper, it is necessary: [1]
SPECIAL PLANS, INC., Promulgated:
that each one of the obligors be bound
Respondent. June 29, 2010
principally, and that he be at the same time a x---------------------------------------
principal creditor of the other; [2] that both ----------------------------x
debts consist in a sum of money, or if the
things due are consumable, they be of the
same kind, and also of the same quality if the DECISION
latter has been stated; [3] that the two debts
be due; [4] that they be liquidated and
DEL CASTILLO, J.:
demandable; [5] that over neither of them
there be any retention or controversy,
commenced by third persons and
In Roman Law, compensation was the
communicated in due time to the debtor.
reciprocal extinction of claims between mutual
When all the requisites mentioned in Art. 1279 of
debtors. The effect was to cause a dismissal of the
the Civil Code are present, compensation takes
effect by operation of law, even without the claim, however large, if a counterclaim, however
consent or knowledge of the creditors and
debtors. 5 Undoubtedly, petitioner admits the small, was proven and the indirect result was to
validity of its outstanding accounts with private compel the actor (plaintiff) to deduct the counterclaim
respondent. But whether private respondent is
liable to pay the petitioner a 20% margin or in advance.[1]
commission on the subject sale to Dole
Philippines, Inc. is vigorously disputed. This
circumstance prevents legal compensation Factual Antecedents
from taking place.

The Court agrees with respondent appellate
court that there is no evidence on record from
which it can be inferred that there was any
agreement between the petitioner and private
respondent prohibiting the latter from selling
directly to Dole Philippines, Incorporated.
Definitely, it cannot be asserted that the debit
memo was a contract binding between the
parties considering that the same, was not
signed by private respondent nor was there any
mention therein of any commitment by the latter
to pay any commission to the former.
SELWYN F. LAO AND
EDGAR MANANSALA,
Petitioners,
Lao (Lao) and Manansala (Manansala),
together with Benjamin Jim (Jim), entered into a
Contract of Lease[2] with respondent Special Plans,
Inc. (SPI) over SPIs building at Quezon City.
Petitioners intended to use the premises for their
karaoke and restaurant business known as Saporro
Restaurant.
SPI sent a Demand Letter[3] to the
G.R. No. 164791
petitioners asking for full payment of rentals in
Present:
arrears.
CORONA,
VELASCO, JR.,
LEONARDO-DE CASTRO,
 Receiving no payment, SPI filed a the RTC rendered a Decision [14] affirming

Complaint[4] for sum of money with the Metropolitan with modification the MeTC Decision by ordering

Trial Court (MeTC) of Quezon City, claiming that Jim petitioners to pay SPI the amount of P95,000.00 for

and petitioners have accumulated unpaid rentals. unpaid rentals.[15] The RTC disagreed with the MeTC

on the aspect of off-setting the amount allegedly

Petitioners filed their Answer[5] faulting SPI spent by petitioners for the repairs of the structural

for making them believe that it owns the leased defects of subject property with their unpaid rentals.

property. They likewise asserted that SPI did not

deliver the leased premises in a condition fit for Ruling of the Court of Appeals
petitioners intended use. Thus, petitioners claimed the CA rendered a Decision[18] affirming in
that they were constrained to incur expenses for toto the RTC Decision.
necessary repairs as well as expenses for the repair

of structural defects, which SPI failed and refused to Issues

reimburse. Petitioners prayed that the complaint be Nonetheless, they assert that the amount

dismissed and judgment on their counterclaims be of P545,000.00 they spent for repairs, P125,000.00

rendered.. of which was spent on structural repairs, should be

judicially compensated against the said unpaid

rentals amounting to P95,000.00

Ruling of the Metropolitan Trial Court

the MeTC found that the unpaid rentals Our Ruling

stood at only P95,000.00. It also found that SPI is
solely responsible for repairing the structural defects
of the leased premises,. It held that even assuming The petition is without merit.
that petitioners did not notify SPI about the structural
defects and the urgency to repair the same, Article
The Civil Code provides that compensation
1663 of the Civil Code allows the lessee to make
urgent repairs in order to avoid an imminent danger shall take place when two persons, in their own right,
at the lessors cost. Hence, the MeTC dismissed the
are creditors and debtors of each other.[23] In order for
complaint for lack of cause of action.
compensation to be proper, it is necessary that:
Ruling of the Regional Trial Court

1. Each one of the obligors be

bound principally and that he
be at the same time a principal
creditor of the other;
 2. Both debts consist in a sum of
money, or if the things due are
consumable, they be of the
same kind, and also of the same
quality if the latter has been
stated;
3. The two debts are due:
4. The debts are liquidated and
demandable;
5. Over neither of them be any
retention or controversy,
commenced by third parties and
communicated in due time to the
debtor. [24]
Petitioners failed to properly
discharge their burden to show
that the debts are liquidated
and demandable.
Consequently, legal
compensation is inapplicable.
A claim is liquidated when the amount and
time of payment is fixed.[25] If
acknowledged by the debtor, although not in writing,
[26]
the claim must be treated as liquidated.
As the contract contrastingly treats
necessary repairs, which are on the account of the
lessee, and repairs of structural defects, which are
the responsibility of the lessor, the onus of the
petitioners is two-fold: (1) to establish the existence,
amount and demandability of their claim; and (2) to
show that these expenses were incurred in the repair
of structural defects.
On the basis of Laos testimony, the MeTC
found that the group conducted structural and
necessary repairs thereon, incurring the sum
of P545,000.00, P125,000.00 of which was spent on
structural defects.
We are not persuaded. The evidence
presented by the petitioners failed to establish by
preponderant evidence that they have indeed
spent the amounts they claim.
Further manifesting the present appeals
lack of merit, petitioner Lao, as shown above in his
testimony, did not define the lessors and the lessees
understanding of the demarcation between repairs of
structural defects and necessary repairs. Even
petitioners second witness, the contractor who
supposedly performed the repair work on the leased
premises, did not credibly and categorically testify on
classification of structural repairs:
The petitioners attempted to prove that they
spent for the repair of the roofing, ceiling and flooring,
as well as for waterproofing. However, they failed to
appreciate that, as per their lease contract, only
structural repairs are for the account of the lessor,
herein respondent SPI. Consequently, their claim
remains unliquidated and, legal compensation is
inapplicable.

WHEREFORE, the instant petition is DENIED.
G.R. No. L-67649 June 28, 1988
ENGRACIO FRANCIA, petitioner,
vs.
INTERMEDIATE APPELLATE COURT and HO
FERNANDEZ, respondents.
Engracio Francia is the registered owner of a
residential lot and a two-story house built. a 125
square meter portion of Francia's property was
expropriated by the Republic of the Philippines
for the sum of P4,116.00 representing the
estimated amount equivalent to the assessed
value of the aforesaid portion.
Since 1963 up to 1977 inclusive, Francia failed
to pay his real estate taxes. Thus, his property
was sold at public auction by the City Treasurer
of Pasay City. Fernandez was the highest
bidder for the property.
On March 3, 1979, Francia received a notice of
hearing "In re: Petition for Entry of New
Certificate of Title" filed by Fernandez, seeking
the cancellation ofher title ) and the issuance in
his name of a new certificate of title. Upon
verification through his lawyer, Francia
discovered that a Final Bill of Sale had been
issued in favor of Ho Fernandez by the City
Treasurer. Francia filed a complaint to annul the
auction sale. the lower court dismissed
The Intermediate Appellate Court affirmed the
decision of the lower court in toto.
Hence, this petition for review.
Francia prefaced his arguments with the
following assignments of grave errors of law:
Francia contends that his tax delinquency of
P2,400.00 has been extinguished by legal
compensation. He claims that the government
owed him P4,116.00 when a portion of his land
was expropriated. Hence, his tax obligation had
been set-off by operation of law.There is no legal
basis for the contention. By legal compensation,
obligations of persons, who in their own right are
reciprocally debtors and creditors of each other,
are extinguished (Art. 1278, Civil Code). The
circumstances of the case do not satisfy the
requirements provided by Article 1279, to wit:
(1) that each one of the obligors
be bound principally and that he
be at the same time a principal
creditor of the other;
xxx xxx xxx
(3) that the two debts be due.
xxx xxx xxx
This principal contention of the petitioner has no
merit. We have consistently ruled that there can
be no off-setting of taxes against the claims that
the taxpayer may have against the government.
A person cannot refuse to pay a tax on the
ground that the government owes him an
amount equal to or greater than the tax being
collected. The collection of a tax cannot await
the results of a lawsuit against the government.
government and taxpayer are not mutually
creditors and debtors of each other' under Article
1278 of the Civil Code and a "claim for taxes is
not such a debt, demand, contract or judgment
as is allowed to be set-off."
There are other factors which compel us to rule
against the petitioner. The tax was due to the
city government while the expropriation was
effected by the national government. Moreover,
the amount paid by the national government for
the 125 square meter portion of his lot was
deposited with the Philippine National Bank long
before the sale at public auction of his remaining
property. The petitioner admitted in his testimony
that he knew about the P4,116.00 deposited with
the bank but he did not withdraw it. It would
have been an easy matter to withdraw
P2,400.00 from the deposit so that he could pay
the tax obligation thus aborting the sale at public
auction.
Petitioner had one year within which to redeem
his property although, as well be shown later, he
claimed that he pocketed the notice of the
auction sale without reading it.
Petitioner, therefore, was notified about the
auction sale. It was negligence on his part when
he ignored such notice. By his very own
admission that he received the notice, his now
coming to court assailing the validity of the
auction sale loses its force.
Petitioner's third assignment of grave error
likewise lacks merit. As a general rule, gross
inadequacy of price is not material we held that
"alleged gross inadequacy of price is not
material when the law gives the owner the right
to redeem as when a sale is made at public
auction, upon the theory that the lesser the
price, the easier it is for the owner to effect
redemption."
And finally, even if we are inclined to give relief
to the petitioner on equitable grounds, there are
no strong considerations of substantial justice in
his favor. Mr. Francia failed to pay his taxes for
14 years from 1963 up to the date of the auction
sale. He claims to have pocketed the notice of
sale without reading it which, if true, is still an act
of inexplicable negligence. He did not withdraw
from the expropriation payment deposited with
the Philippine National Bank an amount
sufficient to pay for the back taxes.. There is
furthermore no showing of bad faith or collusion
in the purchase of the property by Mr.
Fernandez. The petitioner has no standing to
invoke equity in his attempt to regain the
property by belatedly asking for the annulment
of the sale.
WHEREFORE, IN VIEW OF THE FOREGOING,
the petition for review is DISMISSED.
BANK OF THE PHILIPPINE
ISLANDS, petitioner, vs. COURT OF
APPEALS and BENJAMIN C.
NAPIZA, respondents.
Private respondent deposited in Foreign
Currency Deposit Unit (FCDU) Savings
Account which he maintained in petitioner
banks, Continental Bank Managers Check dated
August 17, 1984, payable to "cash" in the
amount of ($2,500.00) and duly endorsed by
private respondent.[5] It appears that the check
belonged to a certain Henry Chan. Private
respondent acceded, and agreed to deliver to
Chan a signed blank withdrawal slip, with the
understanding that as soon as the check is
cleared, both of them would go to the bank to
withdraw the amount of the check upon private
respondents presentation to the bank of his
passbook.
Using the blank withdrawal slip given by private
respondent to Chan, , one Ruben Gayon, Jr.
was able to withdraw the amount of $2,541.67.
Notably, the withdrawal slip shows that the
amount was payable to Ramon A. de Guzman
and Agnes C. de Guzman and was duly initialed
by the branch assistant.[6]
petitioner received communication from the
Wells Fargo Bank International of New York
that the said check deposited by private
respondent was a counterfeit
check[7] because it was "not of the type or style
of checks issued by Continental Bank
International."[8] The bank tried to inform private
respondent by informing his son and sending a
telegram. Private respondents son undertook to
return the amount to petitioner bank. The bank
reminded private respondent of his sons
promise and warned that should he fail to return
that amount within seven (7) days, the matter
would be referred for appropriate action. In reply,
private respondent wrote petitioners
counsel stating that he deposited the check "for
clearing purposes" only to accommodate Chan.
petitioner filed a complaint against private
respondent, praying for the return of the amount
of $2,500.00 or the prevailing peso equivalent
plus legal interest from date of demand to date
of full payment, a sum equivalent to 20% of the
total amount due as attorney's fees, and
litigation and/or costs of suit.
Private respondent filed his answer, admitting
that he indeed signed a "blank" withdrawal slip
with the understanding that the amount
deposited would be withdrawn only after the
check in question has been cleared. He likewise
alleged that he instructed the party to whom he
issued the signed blank withdrawal slip to return
it to him after the bank drafts clearance so that
he could lend that party his passbook for the
purpose of withdrawing the amount of
$2,500.00. However, without his knowledge,
said party was able to withdraw the amount from
his dollar savings account through collusion with
one of petitioners employees. Petitioner should
have disallowed the withdrawal because his
passbook was not presented.
a decision was rendered dismissing the
complaint. The lower court held that petitioner
could not hold private respondent liable based
on the checks face value alone. To so hold him
liable "would render inutile the requirement of
clearance from the drawee bank before the
value of a particular foreign check or draft can
be credited to the account of a depositor making
such deposit." On appeal, the Court of Appeals
affirmed the lower courts decision. The appellate
court held that petitioner committed "clear gross
negligence" in allowing Ruben Gayon, Jr. to
withdraw the money without presenting private
respondents passbook and, before the check
was cleared and in crediting the amount
indicated therein in private respondents account.
. foreign currency deposit system, two requisites
Without filing a motion for the reconsideration of
the Court of Appeals Decision, petitioner filed
this petition for review on certiorari, raising the
following issues:
1.......WHETHER OR NOT
RESPONDENT NAPIZA IS
LIABLE UNDER HIS
WARRANTIES AS A GENERAL
INDORSER.
2.......WHETHER OR NOT A
CONTRACT OF AGENCY WAS
CREATED BETWEEN
RESPONDENT NAPIZA AND
RUBEN GAYON.
3.......WHETHER OR NOT
PETITIONER WAS GROSSLY
NEGLIGENT IN ALLOWING
THE WITHDRAWAL.
Petitioner claims that private respondent, having
affixed his signature at the dorsal side of the
check, should be liable for the amount stated
therein in accordance with the Negotiable
Instruments Law as general indorser.
It is thus clear that ordinarily private respondent
may be held liable as an indorser of the check or
even as an accommodation party.[17]However, to
hold private respondent liable for the amount of
the check he deposited by the strict application
of the law and without considering the attending
circumstances in the case would result in an
injustice and in the erosion of the public trust in
the banking system. The interest of justice thus
demands looking into the events that led to the
encashment of the check.
In the passbook that petitioner issued to private
respondent, the following rules on withdrawal of
deposits appear
Under these rules, to be able to withdraw from
the savings account deposit under the Philippine
must be presented to petitioner bank by the
person withdrawing an amount: (a) a duly filled-
up withdrawal slip, and (b) the depositors
passbook. Petitioner contends that "(i)nsignbing
a blank withdrawal slip, respondent practically
authorized any possessor thereof to write any
amount and to collect the same."[20]
Such contention would have been valid if not for
the fact that the withdrawal slip itself indicates a
special instruction that the amount is payable to
"Ramon A. de Guzman &/or Agnes C. de
Guzman." Such being the case, petitioners
personnel should have been duly warned that
Gayon, was not the proper payee of the
proceeds of the check. Of course, at the dorsal
side of the withdrawal slip is an "authority to
withdraw" naming Gayon the person who can
withdraw the amount indicated in the check.
Private respondent does not deny having signed
such authority. However, considering petitioners
clear admission that the withdrawal slip was a
blank one except for private respondents
signature, the unavoidable conclusion is that the
typewritten name of "Ruben C. Gayon, Jr." was
intercalated and thereafter it was signed by
Gayon or whoever was allowed by petitioner to
withdraw the amount. Under these facts, there
could not have been a principal-agent
relationship between private respondent and
Gayon so as to render the former liable for the
amount withdrawn.
Moreover, the withdrawal slip contains a boxed
warning that states: "This receipt must be signed
and presented with the corresponding foreign
currency savings passbook by the depositor in
person. For withdrawals thru a representative,
depositor should accomplish the authority at the
back." As correctly held by the Court of Appeals,
in depositing the check in his name, private
respondent did not become the outright owner of
the amount stated therein. Under the above rule,
by depositing the check with petitioner, private
respondent was, in a way, merely designating
petitioner as the collecting bank. This is in
consonance with the rule that a negotiable
instrument, such as a check, whether a
managers check or ordinary check, is not legal
tender.[23] As such, after receiving the deposit,
under its own rules, petitioner shall credit the
amount in private respondents account or infuse
value thereon only after the drawee bank shall
have paid the amount of the check or the check
has been cleared for deposit.
Said ruling brings to light the fact that the
banking business is affected with public interest.
By the nature of its functions, a bank is under
obligation to treat the accounts of its depositors
"with meticulous care, always having in mind the
fiduciary nature of their relationship."[27] As such,
in dealing with its depositors, a bank should
exercise its functions not only with the diligence
of a good father of a family but it should do so
with the highest degree of care.[28]
In the case at bar, petitioner, in allowing the
withdrawal of private respondents deposit, failed
to exercise the diligence of a good father of a
family. In total disregard of its own rules,
petitioners personnel negligently handled private
respondents account to petitioners detriment
Petitioner violated its own rules by allowing the
withdrawal of an amount that is definitely over
and above the aggregate amount of private
respondents dollar deposits that had yet to be
cleared. From these facts on record, it is at
once apparent that petitioners personnel allowed
the withdrawal of an amount bigger than the
original deposit of $750.00 and the value of the
check deposited in the amount of $2,500.00
although they had not yet received notice from
the clearing bank in the United States on
whether or not the check was funded.
Petitioners contention that after the lapse of the
35-day period the amount of a deposited check
could be withdrawn even in the absence of a
clearance thereon, otherwise it could take a long
time before a depositor could make a
withdrawal,[36] is untenable. Said practice
amounts to a disregard of the clearance
requirement of the banking system.
While it is true that private respondents having
signed a blank withdrawal slip set in motion the
events that resulted in the withdrawal and
encashment of the counterfeit check, the
negligence of petitioners personnel was the
proximate cause of the loss that petitioner
sustained. The proximate cause of the
withdrawal and eventual loss of the amount of
$2,500.00 on petitioners part was its personnels
negligence in allowing such withdrawal in
disregard of its own rules and the clearing
requirement in the banking system.
G.R. No. 206806 June 25, 2014
ARCO PULP AND PAPER CO., INC. and
CANDIDA A. SANTOS, Petitioners,
vs.
DAN T. LIM, doing business under the name
and style of QUALITY PAPERS & PLASTIC
PRODUCTS ENTERPRISES, Respondent.
DECISION
LEONEN, J.:
Novation must be stated in clear and
unequivocal terms to extinguish an obligation. It
cannot be presumed and may be implied only if
the old and new contracts are incompatible on
every point.
Dan T. Lim works in the business of supplying
scrap papers, cartons, and other raw
materialsHe delivered scrap papers worth
7,220,968.31 to Arco Pulp and Paper Company,
Inc. (Arco Pulp and Paper).5 The parties
allegedly agreed that Arco Pulp and Paper
would either pay Dan T. Lim the value of the raw
materials or deliver to him their finished products
of equivalent value.6
Dan T. Lim alleged that when he delivered the
raw materials, Arco Pulp and Paper issued a
post-dated check in the amount of 1,487,766.68
as partial payment, with the assurance that the
check would not bounce.8 When he deposited
the check, it was dishonored for being drawn
against a closed account.9
On the same day, Arco Pulp and Paper and a
certain Eric Sy executed a memorandum of
agreement10 where Arco Pulp and Paper bound
themselves to deliver their finished products to
Megapack Container Corporation, owned by Eric
Sy, for his account. According to the
memorandum, the raw materials would be
supplied by Dan T. Lim,
Dan T.Lim sent a letter12 to Arco Pulp and Paper
demanding payment of the amount of
7,220,968.31, but no payment was made to
him.13
Dan T. Lim filed a complaint14 for collection of
sum of money with prayer for attachment with
the Regional Trial Court,On September 19,
2008, the trial court rendered a judgment in
favor of Arco Pulp and Paper and dismissed the
complaint, holding that when Arco Pulp and
Paper and Eric Sy entered into the
memorandum of agreement, novation took
place, which extinguished Arco Pulp and
Papers obligation to Dan T. Lim.17
Dan T. Lim appealed18 the judgment with the
Court of Appeals. According to him, novation did
not take place since the memorandum of
agreement between Arco Pulp and Paper and
Eric Sy was an exclusive and private agreement
between them. The Court of Appeals20 rendered
a decision21 reversing and setting aside the
judgment and ordering Arco Pulp to pay Dan T.
Lim,WON THERE IS A NOVATION
On one hand, petitioners argue that the
execution of the memorandum of agreement
constituted a novation of the original obligation
since Eric Sy became the new debtor of
respondent. The petition is denied.
The obligation between the
parties was an alternative
obligation
The rule on alternative obligations is governed
by Article 1199 of the Civil Code, which states:
Article 1199. A person alternatively bound by
different prestations shall completely perform
one of them.
The creditor cannot be compelled to receive part
of one and part of the other undertaking.
"In an alternative obligation, there is more than
one object, and the fulfillment of one is sufficient,
determined by the choice of the debtor who
generally has the right of election."32 The right of
election is extinguished when the party who may
exercise that option categorically and
unequivocally makes his or her choice known.33
The choice of the debtor must also be
communicated to the creditor who must receive
notice of it and only after said notice shall the
election take legal effect when consented by the
creditor, or if impugned by the latter, when
declared proper by a competent court.34
By agreement, petitioner Arco Pulp and Paper,
as the debtor, had the option to either (1) pay
the price or(2) deliver the finished products of
equivalent value to respondent.35
When petitioner Arco Pulp and Paper tendered a
check to respondent in partial payment for the
scrap papers, they exercised their option to pay
the price. Respondents receipt of the check and
his subsequent act of depositing it constituted
his notice of petitioner Arco Pulp and Papers
option to pay.
This choice was also shown by the terms of the
memorandum of agreement, which was
executed on the same day. The memorandum
declared in clear terms that the delivery of
petitioner Arco Pulp and Papers finished
products would be to a third person, thereby
extinguishing the option to deliver the finished
products of equivalent value to respondent.
The memorandum of
agreement did not constitute
a novation of the original
contract
The rules on novation are outlined in the Civil
Code, thus:
Article 1291. Obligations may be modified by:
(1) Changing their object or principal
conditions;
(2) Substituting the person of the debtor;
(3) Subrogating a third person in the
rights of the creditor. (1203)
Article 1292. In order that an obligation may be
extinguished by another which substitute the
same, it is imperative that it be so declared in
unequivocal terms, or that the old and the new
obligations be on every point incompatible with
each other. (1204)
Article 1293. Novation which consists in
substituting a new debtor in the place of the
original one, may be made even without the
knowledge or against the will of the latter, but
not without the consent of the creditor. In
general, there are two modes of substituting the
person of the debtor: (1) expromision and (2)
delegacion. In expromision, the initiative for the
change does not come from and may even
be made without the knowledge of the
debtor, since it consists of a third persons
assumption of the obligation. As such, it logically
requires the consent of the third person and the
creditor. In delegacion, the debtor offers, and
the creditor accepts, a third person who
consents to the substitution and assumes the
obligation; thus, the consent of these three
persons are necessary. Both modes of
substitution by the debtor require the consent of
the creditor.
Novation may also be extinctive or modificatory.
It is extinctive when an old obligation is
terminated by the creation of a new one that
takes the place of the former. It is merely
modificatory when the old obligation subsists to
the extent that it remains compatible with the
amendatory agreement.
For novation to take place, the following
requisites must concur:
 1) There must be a previous valid
obligation.
2) The parties concerned must agree to
a new contract.
3) The old contract must be
extinguished.
4) There must be a valid new contract.
Novation may also be express or implied.
Because novation requires that it be clear and
unequivocal, it is never presumed,
The consent of the creditor must also be
secured for the novation to be valid:
Novation must be expressly consented to. If the
memorandum of agreement was intended to
novate the original agreement between the
parties, respondent must have first agreed to the
substitution of Eric Sy as his new debtor. The
memorandum of agreement must also state in
clear and unequivocal terms that it has
replaced the original obligation of petitioner Arco
Pulp and Paper to respondent. Neither of these
circumstances is present in this case.
Petitioner Arco Pulp and Papers act of tendering
partial payment to respondent also conflicts with
their alleged intent to pass on their obligation to
Eric Sy. When respondent sent his letter of
demand to petitioner Arco Pulp and Paper, and
not to Eric Sy, it showed that the former neither
acknowledged nor consented to the latter as his
new debtor. These acts, when taken together,
clearly show that novation did not take place.
Since there was no novation, petitioner Arco
Pulp and Papers obligation to respondent
remains valid and existing. Petitioner Arco Pulp
and Paper, therefore, must still pay respondent
the full amount of P7,220,968.31.
G.R. No. L-29280 August 11, 1988
PEOPLE'S BANK AND TRUST
COMPANY, plaintiff-appellee,
vs.
SYVEL'S INCORPORATED, ANTONIO Y.
SYYAP and ANGEL Y SYYAP, defendants-
appellants.
This is an action for foreclosure of chattel
mortgage executed in favor of the plaintiff by the
defendant Syvel's Incorporated on its stocks of
goods, personal properties and other materials
owned by it and located at its stores or
warehouses. The chattel mortgage was in
connection with a credit commercial line in
the amount of P900,000.00 granted the said
defendant corporation, the expiry date of
which was May 20, 1966. On May 20, 1965,
defendants Syyaps executed an undertaking in
favor of the plaintiff whereby they both agreed to
guarantee absolutely and unconditionally the full
and prompt payment of any indebtedness to be
incurred on account of the said credit line. In
view of the failure of the defendant corporation
to make payment in accordance with the terms
and conditions agreed upon the plaintiff started
to foreclose extrajudicially the chattel mortgage.
However, because of an attempt to have the
matter settled, the extra-judicial foreclosure was
not pushed thru. As no payment had been paid,
this case was filed in this Court.
After the filing of this case in this
court defendant proposed to
have the case settled amicably
and offered to execute a real
estate mortgage on his real
property in Cavite. the Real
Estate Mortgage, was executed
by the defendant Antonio V.
Syyap. In that deed of
mortgage, defendant Syyap
admitted that as of June 16,
1967, the indebtedness of
Syvel's Incorporated was
P601,633.01.. Amotion to
dismiss this case was filed by
plaintiff but the defendants did
not want to agree if the
dismissal would mean also the
dismissal of their counterclaim.
Hence, trial proceeded.
 and the "new" agreements as the second
contract indicates that the same was executed
In their brief, appellants assign the following as new additional security to the chattel
errors: mortgage previously entered into by the parties.

I Moreover, records show that in the real estate

The lower court erred in not holding that
the obligation secured by the Chattel
Mortgage sought to be foreclosed in the
above-entitled case was novated by the
subsequent execution between appellee
and appellant Antonio V, Syyap of a real
estate mortgage as additional collateral to
the obligation secured by said chattel
mortgage.
mortgage, appellants agreed that the chattel
mortgage "shall remain in full force and shall not
be impaired by this (real estate) mortgage."
It is clear, therefore, that a novation was not
intended. The real estate mortgage was
evidently taken as additional security for the
performance of the contract.

Appellants contention is without merit.

Novation takes place when the object or

principal condition of an obligation is
changed or altered. It is elementary that
novation is never presumed; it must be
explicitly stated or there must be manifest
incompatibility between the old and the new
obligations in every aspect (Goni v. CA, 144
SCRA 223 [1986]; National Power Corp. v.
Dayrit, 125 SCRA 849 [1983]).

There is nothing in the Real Estate Mortgage

which supports appellants'submission. The
contract on its face does not show
incompatibility on every point between the "old